Interest and Inflation

Per the Bureau of Labor Statistics, the rate of inflation in the prices of consumer goods and services was roughly 4.5% from December of 1996 to December of 1997. Yet the Federal Reserve, which up until a few months ago was mightily concerned about such inflation, has now set its federal funds rate target at 3.5%.

The Fed publicly stated last week that it expected "inflation to moderate in coming quarters". Given the extent to which the dollar has sunk in value relative to most major, if not all, global currencies so far this century, in no small part thanks to the Fed itself, one must contemplate just how much this newfound indifference to inflation will continue.

In the near term, the Fed may be able to keep short rates low, with another rate cut expected this week to be announced after the FOMC meeting. But eventually those rates should start to creep up.

So what does this mean for you? If perhaps you are considering seeking debt financing, between now and June may be the time to lock in a decent rate before the Fed is forced to do the obvious and begin to raise the fed funds target rate to deal with inflation and the continuing weakness in the dollar. But be mindful that we might be headed into an economic slowdown in which emergency Fed actions and dead cat bounces in the equity markets can mask no longer.

The Fed forestalls the inevitable

The Federal Open Market Committee announced prior to today's market open that it had lowered its federal funds target by three-quarters of a percent, or 75 basis points, to 3.50%.

This certainly feels like the house extending a drunk casino patron more credit after they've already burned through their last two extensions.

Anyways, naturally the dollar continues its slide, though no matter how low it goes, it's still cheaper to manufacture products in China or provide services in India. One also has to wonder how long the Chinese will continue to subsidize the United States with its willingness to plow the dollars sent its way back into US government debt, thereby helping to keep interest rates low. For how long will the Chinese government be able or willing to continue this arrangement? Yes, it has brought tremendous growth to the Chinese economy, but at some point one would have to think that the Chinese people will have had enough of the fruits of their labor not being reinvested in their own homeland.

The American consumer now stands on the precipice. Saddled by debt, their home values in decline, and now their equity market wealth slowly disappearing. Not to mention that the vast majority of their assets are in...dollars.

It's also interesting to note that the Fed seems almost entirely focused on making life easier for Wall Street. Of course, given that Main Street's fortunes are so closely tied to it, perhaps it's not that surprising.

It's Coming

Despite the public efforts of the Fed and the Bush Administration, last week the Dow fell 507 points. The S&P 500 Index is currently down 9.75% for the year through last Friday's close.

Today, markets from Asia to Europe are dropping like rocks in anticipation of the US economy heading into recession.

Is your firm recession proof? How's your liquidity? Have you been letting your receivables age a little bit too well and have you been paying your vendors too fast? Are your major customers looking shaky?

Looking for a light at the end of the tunnel and hoping it's not a train? Well, start here.

Don't Let Your Business Lose Money for Too Long!

Over the holidays we were asked by an investor to examine a company and determine if it could survive. We reviewed the financial records and met with management. At the end of our review both we and management agreed that we were about a year too late in saving the company! What difference does a year make?

What was different one year ago? The company had a profitable business surrounded by money losing products and high overhead. Action could have been taken to shed the unprofitable business, reduce expenses and grow the profitable sales. Unfortunately, time had run out!

One year ago the company had positive working capital and a good relationship with their vendors. Over the past year they consumed their cash and disappointed their vendors to the point that no one was willing to work with them. The best analogy would be to imagine you are flying an airplane and the engine stops. As the plane plummets toward the earth you don't wait until 1000 feet over the ground to bring it out of a dive! Same thing with a company!

If you find your company in a dive and losing money you should remember two rules:

Rule #1: Don't Lose Money!
Rule #2: See Rule #1!

It is imperative to take corrective action early in the crisis. Most entrepreneurs do not want to take one step backward. Unfortunately, it is sometimes necessary in order to survive a recession.

On the Cusp of a Recession?

In December, the US unemployment rate rose to a two year high of 5.0%, the worst since 2005. That increase was also the largest one month increase since April of 1995. A scant 18,000 jobs were added to payrolls in December, per the US Department of Labor. 2007 was the worst year for US job creation since 2003.

Now is the time to think seriously about how a recession might affect your firm. How are your major customers faring? Would they be able to weather a major economic downturn this year?

Would you?